HCA Red Flag: Alphabet beats expectations on Cloud, but disappoints on earnings (AI)
HC Andersen Capital
Summary
- Alphabet's Q3 2026 earnings per share were USD 2.67, falling short of the expected USD 2.97, primarily due to higher AI costs and weaker search growth.
- Google Cloud exceeded expectations with revenues of USD 30.7 billion, driven by demand for AI infrastructure and proprietary AI chips, contributing to a positive growth narrative.
- Free cash flow was negative at USD -9.1 billion, impacted by a USD 5.2 billion EU fine, with expansion funded through share dilution and debt.
- Capital expenditures were USD 51.4 billion, USD 4 billion below expectations, alleviating concerns of further budget increases.
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Automatic translation: Originally published in Danish 28/10/2026, 20:08 GMT. Give feedback here.
Red Flag · First read of the financial report · AI-generated content
HCA Red Flag: Alphabet beats expectations on Cloud, but disappoints on earnings (AI)
Alphabet (GOOGL) · Q3 2026 · October 28
The share is down 1.8% over the 3 months leading up to October 27, 21.5% below its peak from May
| Overall assessment | Slightly negative assessment |
| Positive assessment | Balanced | Negative assessment |
The underlying earnings per share of USD 2.67 vs. the expected USD 2.97 points to a lower start, as higher AI costs and weaker search growth drag down estimates. Google Cloud cleared the threshold at USD 30.7 billion vs. the expected USD 29.6 billion, so the growth narrative remains intact.
Red flags in the financial report
Higher AI costs pull earnings 10% below expectations
Actual USD 2.67 · Est. USD 2.97
Joint AI research behind models like Gemini cost USD 7.7 billion vs. USD 5.8 billion in the previous quarter, and the operating margin fell to 31.8% vs. the expected 33.7%. If that level continues, 2027 estimates will have to be cut.
More searches, but search sales are flat
Actual USD 63.4 billion · Est. ~USD 65 billion
Search sales grew by only 12% and remained flat from Q2, even though CEO Sundar Pichai reported the fastest growth in the number of searches in five years. This fuels fears that AI answers generate less revenue per search.
Free cash flow is negative again
Actual USD -9.1 billion · Est. USD -3.7 billion
An EU fine of USD 5.2 billion explains almost the entire deviation, but Alphabet sold new shares worth USD 12.4 billion and borrowed USD 28.7 billion during the quarter. Expansion is now being funded through dilution and debt.
Green flags in the financial report
Google Cloud grows 103% and beats expectations
Actual USD 30.7 billion · Est. USD 29.6 billion
Google Cloud, the group's cloud and AI business, grew on demand for AI infrastructure, and sales of proprietary AI chips (TPU systems) made a noticeable contribution, according to the company. This lifts expectations for Cloud in 2027.
Cloud margin rises despite expensive leased computing power
Actual 36.2% · Q2 35.6%
Google Cloud operating profit came in at USD 11.1 billion, more than three times higher than a year ago, even though the CFO had warned of margin pressure from leased capacity. Consequently, AI investments are already generating a profit.
Capital expenditures come in USD 4 billion below expectations
Actual USD 51.4 billion · Est. USD 55.4 billion
Investments in data centers and chips (capex) rose 114%, but came in 7% below expectations, and the announcement does not raise the USD 195–205 billion budget. This dampens fears of another upward revision.
Disclaimer: This is an HCA AI-generated research commentary based solely on the company's published financial report. The commentary does not constitute investment advice and should not be relied upon as the sole basis for investment decisions. Investing in shares involves the risk of loss. Seek professional advice. /HC Andersen Capital, 21:07, October 28, 2026
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